Spain: Crisis prompts overhaul
Social partners are set to agree changes to state pensions, according to Gail Moss, while the industry awaits detailed proposals aimed to boost supplementary pensions
Spain’s pensions legislation is going through a period of major flux, with big changes in store for both first and second pillars over the coming year. The government’s strategy is to sort out first-pillar provision, before tackling the shortcomings of the second pillar.
And the race to get legislation on the statute book has heated up.
“Pension reform is one of the pillars around which negotiations between Brussels and Madrid have pivoted, in order to soften the deficit target for Spain,” says Rosa Di Capua, partner, Mercer Spain. “The aim is for the Bill to be approved by the cabinet in late September, and from there pass directly to the Toledo Pact – made up of parliamentary and social partner representatives – for negotiation. But agreement appears difficult, especially given the main opposition Socialist Party is opposed to this reform.”
Like other countries, Spain needs to rebalance its social security budget. And the main objective of the planned legislation is to lay down the basis for calculating the sustainability factor to adjust the level of the state pension which until, recently, averaged 80% of the individual’s previous salary in employment, up to a limit of €35,000 per year.
In early June, a group of experts presented their conclusions to the government, which then consulted social partners on its own proposed measures early in September.
The proposals combine two formulae. The intergenerational equity factor will be based on an individual’s age, reducing future pensions according to increases in longevity. And the annual revaluation factor, used to uprate pensions in line with inflation, will, in addition to the consumer price index (CPI), be adjusted in line with other indices, or factors such as gross GDP and the level of contributions.
The government amended the experts’ proposal in order to avoid huge variations each year in the level of pension, introducing a minimum and maximum increase.
There will be a guaranteed floor of 0.25%, and a cap of (CPI) + 0.25%.
The annual revaluation factor will be in force for 2014. The intergenerational equity factor will not, however, be introduced until 2019.
“It is difficult to ignore the figures on growing numbers of retirees, their life expectancy (one more year in every eight-year period), and unemployment of 27%, reducing contributions to the Social Security Fund,” says Di Capua. “But although the government measures have watered down the proposals of the expert committee, they have been rejected by the unions.”
“The government is being non-committal, but the effect will be to make pensions lower in real terms compared with today,” says Ángel Martínez-Aldama, director-general of Spain’s Investment and Pension Fund Association (INVERCO).
Furthermore, says Di Capua, the reforms in the calculation of the pension only affect future pensions, but pensions already in payment need to be managed too, and the proposed revaluation factor is a reasonable way to do it.
“It makes sense to review the revaluation criteria for these pensions too, since salary increases are probably no longer linked to the CPI, but more towards company performance and results,” she says. “And more information about the statutory pension is needed so they can make prudent decisions about how to create private savings plans, whether occupational or individual.”
The draft Parliamentary Bill was expected to be published by end-September, before IPE went to press, and take effect next year.
Meanwhile, second-pillar reform proposals are expected in October or November.
Spain’s Insurance and Pension Funds Directorate recently produced two draft reports on possible reforms, but there has been no official response from politicians as yet; the next step will be to present it to a Parliamentary Commission.
But since most people have until now relied on the state pension for their retirement income, the aim will be to kick-start much greater private pension coverage, in what is still a relatively underdeveloped market.
“In comparison with other European countries, the level of second-pillar saving is low,” says Jaume Jardon, pensions manager at Deloitte in Barcelona. “The objective is not to put more money into pillar two, but make people realise that pillar one must be reduced in future. At the same time, pillar two needs to be improved, or many people will face reduced incomes in retirement.”
However, there is criticism about the lack of public debate over the past few years.
“The problem in Spain is that there is still no clear policy about the second and third pillars,” says Jon Aldecoa, consultant at Novaster. “Many proposals and plans give both schemes the same importance, but there is no clear role for either of them. But if the aim is to have good coverage of the working population, it can only be done at occupational level.”
He says that because the state pension reforms will reduce the replacement ratio as a percentage of salary, supplementary schemes are needed: “And to that end, occupational schemes in Spain should be made widely available, and not just for the big companies with high earners. Furthermore, occupational schemes are likely to have better investment policies and lower costs than personal schemes.”
There is general agreement that, in order to be effective, the reforms should focus especially on helping small and medium-sized enterprises (SMEs) in setting up occupational schemes, which are hampered by red tape.
“This could be helped, say, by industry-wide schemes or tailor-made plans for specific companies,” says Jardon.
Next, tax incentives for both employees and companies are generally supported. Companies deduct their contribution as a salary expense, with certain restrictions, but Jardon would like to see long-term tax breaks for these companies, as well as greater tax deductions on their annual contributions.
And Aldecoa warns that tax incentives should be enhanced for medium and low income earners, as suggested by the EU and the OECD.One way to do this might be a minimum matching rate for tax deductions higher than their marginal tax rate.
A further issue is the provision of information for future pensioners. “In Spain, there is no realistic way for an individual to find out, in advance, the level of pension they will receive on retirement,” says Jardon. “It is not clear how this is going to be delivered for the second and third pillars, although the plans for providing information on the first pillar are more developed.”
One of the biggest headaches for the government is likely to be the issue of compulsion.
“We consider it more feasible to follow the UK system of auto-enrolment, rather than a mandatory system as in Sweden and Australia,” says Martínez-Aldama. “This would oblige companies to put in place a pension system, but give employees the option of deciding not to enter the pension plan. It is the only way to increase coverage.”
“Compulsion does not seem to be workable, because of the current economic situation,” agrees Jardon. “Moreover, compulsory contributions would be seen as a new tax.”